Foreign capital plays a pivotal role in shaping financial markets; however, its effects differ across investment types and institutional contexts. This study examines how greenfield investment, mergers and acquisitions (M&A) and foreign portfolio investment (FPI) influence financial market development (FMD), with institutional quality (IQ) as a moderating factor, in emerging and advanced economies from 2003 to 2021. Using panel-corrected standard errors (PCSEs) and two-step system generalized method of moments (GMM) estimations, we find that in emerging economies, greenfield investment constrains FMD, while M&A fosters it. FPI has an insignificant negative impact, whereas IQ has an insignificant positive effect. In contrast, in advanced economies, greenfield investment, M&A and strong institutions collectively support FMD, whereas FPI remains neutral. Moderation analysis reveals that robust IQ not only positively moderates the negative impact of greenfield foreign direct investment (FDI) on FMD in emerging economies but also amplifies the benefits of foreign capital in advanced economies. The findings highlight that emerging economies should channel efforts towards facilitating M&A, while advanced economies should prioritize attracting greenfield FDI. Crucially, in both settings, strengthening IQ emerges as the decisive lever for transforming diverse foreign capital inflows into robust FMD.
AbaidooR., & AgyapongE. K. (2024). Institutional framework, macroeconomic instability, and financial markets: Perspective from emerging economies. Journal of Economic and Administrative Sciences. https://doi.org/10.1108/JEAS-08-2023-0214
2.
AdamsS. (2009). Foreign direct investment, domestic investment, and economic growth in Sub-Saharan Africa. Journal of Policy Modelling, 31(6), 939–949. https://doi.org/10.1016/j.jpolmod.2009.03.003
3.
AdeleyeB. N., & TiwariA. K. (2024). Empirical assessment of methane emissions, socioeconomic factors, and infant mortality in Europe. Natural Resources Forum, 49(4), 1–27. https://doi.org/10.1111/1477-8947.12385
4.
AgyemangO. S., GatsiJ. G., & AnsongA. (2018). Institutional structures and financial market development in Africa. Cogent Economics & Finance, 6(1), 1–15. https://doi.org/10.1080/23322039.2018.1488342
5.
AibaiA., HuangX., LuoY., & PengY. (2019). Foreign direct investment, institutional quality, and financial development along the Belt and Road: An empirical investigation. Emerging Markets Finance and Trade, 55(14), 3275–3294. https://doi.org/10.1080/1540496X.2018.1559139
6.
AkinwaleS. O., & AdekunleO. E. (2019). Globalization and capital market development in Nigeria. Journal of Economics and Business, 2(2), 396–404. https://doi.org/10.31014/aior.1992.02.02.95
7.
Al-DelawiA. S., ShahS. S. H., HarjanS. A., KarimF., MehranM., & AhmadS. (2023). The impact of foreign direct investment on stock market growth: Evidence from Pakistan. International Journal of Management and Sustainability, 12(3), 313–322. https://doi.org/10.18488/11.v12i3.3426
8.
AndrieşA. M., BrodocianuM., & SprinceanN. (2023). The role of institutional investors in the financial development. In Economic change and restructuring (Vol. 56, Issue 1). Springer. https://doi.org/10.1007/s10644-022-09425-0
9.
AvomD., NkoaB. E. O., ZamboC. C. A., KamwaU. K. K., & AtangaD. F. O. (2024). Colonial origins and growth of financial markets in Africa: A comparative analysis based on institutions. Journal of Government and Economics, 13(January). https://doi.org/10.1016/j.jge.2024.10009
10.
BayarY., & GavrileteaM. D. (2018). Foreign direct investment inflows and financial development in Central and Eastern European Union countries: A panel cointegration and causality. International Journal of Financial Studies, 6(2). https://doi.org/10.3390/ijfs6020055
11.
ChletsosM., & SintosA. (2024). Political stability and financial development: An empirical investigation. Quarterly Review of Economics and Finance, 94, 252–266. https://doi.org/10.1016/j.qref.2024.02.003
12.
DaviesR. B., DesbordersR., & RayA. (2018). Greenfield versus merger and acquisition FDI: Same wine, different bottles?The Canadian Journal of Economics, 51(4), 1151–1190.
13.
DemirC. (2019). Macroeconomic determinants of stock market fluctuations: The case of BIST-100. Economies, 7(1). https://doi.org/10.3390/economies7010008
14.
DerbaliA., & LamouchiA. (2020). Global financial crisis, foreign portfolio investment, and volatility: Impact analysis on select Southeast Asian markets. Pacific Accounting Review, 32(2), 177–195. https://doi.org/10.1108/PAR-07-2019-0090
15.
DesbordesR., & WeiS. J. (2017). The effects of financial development on foreign direct investment. Journal of Development Economics, 127, 153–168. https://doi.org/10.1016/j.jdeveco.2017.02.008
16.
DésiréA., EmmanuelO. N. B., ZamboC. C. A., KevinK. K. U., & AtangaD. F. O. (2024). Colonial origins and growth of financial markets in Africa: A comparative analysis based on institutions. Journal of Government and Economics, 13. https://doi.org/10.1016/j.jge.2024.100099
17.
DoytchN., & AshrafA. (2022). The ecological footprints of greenfield FDI and cross-border M&A sales. Environmental Modelling & Assessment, 27(6), 935–951. https://doi.org/10.1007/s10666-021-09777-3
18.
EdoS. (2018). Private capital inflows and stock market interface in Sub-Saharan Africa. In International review of economics (Vol. 65, Issue 4). Springer. https://doi.org/10.1007/s12232-018-0313-z
19.
EmmanuelO. N. B., ThierryM. A., ChristianA. Z. C., & LudéD. (2024). What drives financial market growth in Africa?International Review of Financial Analysis, 91. https://doi.org/10.1016/j.irfa.2023.102990
20.
FamantaM., RandhawaA. A., & YajingJ. (2024). The impact of green FDI on environmental quality in less developed countries: A case study of load capacity factor based on PCSE and FGLS techniques. Heliyon, 10(7), e28217. https://doi.org/10.1016/j.heliyon.2024.e28217
21.
GebrehiwotA., EsfahaniN., & SayimM. (2016). The relationship between FDI and financial market development: The case of the Sub-Saharan African region. International Journal of Regional Development, 3, 2373–9851.
22.
GökçeliE. (2023). Effect of foreign direct investment on financial development: The case of OECD. The Sakarya Journal of Economics, 12(1), 110–124.
23.
GopalanS., OuyangA., & RajanR. S. (2018). Impact of greenfield FDI versus M&A on growth and domestic investment in developing Asia. Economia Politica, 35(1), 41–70. https://doi.org/10.1007/s40888-017-0085-z
24.
HarmsP., & MéonP. G. (2018). Good and useless FDI: The growth effects of greenfield investment and mergers and acquisitions. Review of International Economics, 26(1), 37–59. https://doi.org/10.1111/roie.12302
25.
HarunaH. A., DibalH. S., & IsicheiE. E. (2023). Foreign direct investments and stock market development in Sub-Saharan Africa: Does regulatory quality moderate?Global Business Review. https://doi.org/10.1177/09721509231163712
26.
HasanM. A., SiddiquiA. A., ArsalanM., & SajidA. (2024). The moderating role of institutional quality in the relationship between foreign capital inflows and stock market development: A panel data analysis. Journal of Economic Impact, 6(2), 147–154.
27.
HassounaD., & LewaaelhamdI. (2025). Corruption perception, institutional quality and performance of Egyptian-listed companies: Evidence from econometric models. Journal of Financial Reporting and Accounting. https://doi.org/10.1108/JFRA-09-2024-0643
International Monetary Fund. (2004). Seventeenth meeting of the IMF committee on balance of payments statistics. https://www.imf.org/external/pubs/ft/bop/2004/17.htm
30.
JosephO., & VictorC. (2023). Foreign portfolio investment flow and Nigerian stock exchange. International Journal of Management & Entrepreneurship Research, 5(2), 85–98. https://doi.org/10.51594/ijmer.v5i2.441
31.
KandilM., ShahbazM., & NasreenS. (2015). The interaction between globalization and financial development: New evidence from panel cointegration and causality analysis. Empirical Economics, 49(4), 1317–1339. https://doi.org/10.1007/s00181-015-0922-2
32.
KartalM. T., ErtuğrulH. M., & UlusseverT. (2022). The impacts of foreign portfolio flows and monetary policy responses on stock markets by considering the COVID-19 pandemic: Evidence from Turkey. Borsa Istanbul Review, 22(1), 12–19. https://doi.org/10.1016/j.bir.2021.06.003
33.
KaufmannD., KraayA., & MastruzziM. (2011). The worldwide governance indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220–246. https://doi.org/10.1017/S1876404511200046
34.
KeitaO., YuB., & MoshoeshoeN. L. (2022). Foreign direct investment and financial development in Guinea: Causality analysis. International Journal of Business and Management, 17(3), 1. https://doi.org/10.5539/ijbm.v17n3p1
35.
KetteniE., & KottaridiC. (2019). The impact of regulations on the FDI-growth nexus within the institution-based view: A nonlinear specification with varying coefficients. International Business Review, 28(3), 415–427. https://doi.org/10.1016/j.ibusrev.2018.11.001
36.
KhanM. A., HaddadH., OdehM., HaiderA., & KhanM. A. (2022a). Institutions, culture, or interaction: What determines the financial market development in emerging markets?Sustainability, 14, 1–23.
37.
KhanH., KhanS., & ZuojunF. (2022b). Institutional quality and financial development: Evidence from developing and emerging economies. Global Business Review, 23(4), 971–983. https://doi.org/10.1177/0972150919892366
38.
KhanM. A., MátéD., AbdulahiM. E., SadafR., KhanM. A., PoppJ., & OláhJ. (2024). Do institutional quality, innovation, and technologies promote financial market development?European Journal of International Management, 22(3), 484–507. https://doi.org/10.1504/EJIM.2024.136453
39.
KhattakS. I., & KhanW. A. (2023). Chinese overseas foreign direct investment–international foreign portfolio investment–financial sector development nexus in the Belt and Road Initiative economies: A regional analysis based on third-generation techniques. Journal of the Knowledge Economy, 15(1), 0123456789. https://doi.org/10.1007/s13132-023-01151-w
40.
KwabiF., WonuC., EzeaniE., OwusuA., & LeoneV. (2024). Impacts of cross-border equity portfolio flow and central bank transparency on financial development: The role of economic freedom and international bonds. International Journal of Finance and Economics, 1–29. https://doi.org/10.1002/ijfe.2947
41.
La PortaR., Lopez-de-SilanesF., ShleiferA., & VishnyR. W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155.
42.
LawS. H., & Azman-SainiW. N. W. (2012). Institutional quality, governance, and financial development. Economics of Governance, 13(3), 217–236. https://doi.org/10.1007/s10101-012-0112-z
43.
LindorferR., & ArcyA. (2023). When institutional plates collide : The dynamic impact of informal institutions on capital market development. Journal of Risk and Financial Management, 16(3), 178.
44.
MakoniP. L., & MarozvaG. (2018). The nexus between foreign portfolio investment and financial market development: Evidence from Mauritius. Academy of Strategic Management Journal, 17(5), 1–14.
45.
MapendoJ. J., SenadjkiA., & ChoongY. O. (2025). Stock market development and foreign direct investment: The moderating role of government effectiveness. International Journal of Emerging Markets. https://doi.org/10.1108/IJOEM-04-2024-0597
46.
MishkinF. S. (2009). Globalization and financial development. Journal of Development Economics, 89(2), 164–169. https://doi.org/10.1016/j.jdeveco.2007.11.004
ModuguK. P., & DempereJ. (2020). Country-level governance quality and stock market performance of GCC countries. Journal of Asian Finance, Economics and Business, 7(8), 185–195. https://doi.org/10.13106/JAFEB.2020.VOL7.NO8.185
49.
NamH.-J., BattenJ. A., & RyuD. (2025). Do institutional quality and trade openness enhance the role of financial openness in Eastern European financial development?Global Finance Journal, 64, 101071. https://doi.org/10.1016/j.gfj.2024.101071
50.
NguyenV. B. (2020). FDI and stock market development in developing countries: The role of governance environment. Chiang Mai University Journal of Economics, 24(2), 17–37.
51.
NorthD. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.
52.
PalS., & MahalikM. K. (2024). Determinants of financial development in top and bottom remittances and FDI inflows recipient developing regions—How does institutional quality matter?Journal of the Knowledge Economy, 15(4), 17108–17139. https://doi.org/10.1007/s13132-024-01772-9
53.
PantelopoulosG. (2023). Foreign direct investment vs. foreign portfolio investment concerning human capital: The impact of education on the host OECD countries. Applied Economics Letters, 30(15), 2060–2068. https://doi.org/10.1080/13504851.2022.2091104
54.
RaphaelG. (2024). Causality between financial development and foreign direct investment: Evidence from Tanzania. International Journal of Business Law and Education, 5(1), 158–176.
55.
PesaranM. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22, 265–312. https://doi.org/10.1002/jae
56.
PesaranM. H. (2021). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60(1), 13–50. https://doi.org/10.1007/s00181-020-01875-7
57.
RoodmanD. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867x0900900106
58.
RudiawarniF. A., SulistiawanD., & SergiB. S. (2024). The role of the net purchase of stocks by foreign investors in boosting stock returns: Evidence from the Indonesian stock market. Economic Modelling, 135, 106730. https://doi.org/10.1016/j.econmod.2024.106730
59.
SajidA., HashmiM. A., AbdullahA., & HasanM. A. (2021). Foreign capital inflows and stock market development in Pakistan. Journal of Asian Finance, Economics and Business, 14(5), 936–952. https://doi.org/10.1108/IJHMA-07-2020-0089
60.
SinghaniaM., & SainiN. (2017). Determinants of FPI in developed and developing countries. Global Business Review, 19(1), 187–213. https://doi.org/10.1177/0972150917713280
61.
SvirydzenkaK. (2016). Introducing a new broad-based index of financial development [Working Paper No. 2016(05)]. IMF. https://doi.org/10.5089/9781513583709.001
62.
TsauraiK. (2018). FDI-led financial development hypothesis in emerging markets: The role of human capital development. International Journal of Education Economics and Development, 9(2), 109–123. https://doi.org/10.1504/IJEED.2018.092193
63.
WesterlundJ. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
64.
WilsonM. K., & VencatachellumD. J.-M. (2020). Stock market performance and cross-border mergers and acquisitions in South Africa: 1991 to 2014. Studies in Economics and Finance, 37(1), 28–49. https://doi.org/10.1108/SEF-11-2017-0315
65.
World Investment Report. (2023). Investing in sustainable energy for all. United Nations Conference on Trade and Development. https://unctad.org/webflyer/world-investment-report-2023
66.
XuS., ZhangY., ChenL., LeongL. W., MudaI., & AliA. (2023). How Fintech and effective governance drive the greener energy transition: Evidence from the panel-corrected standard errors approach. Energy Economics, 125. https://doi.org/10.1016/j.eneco.2023.106881
67.
YavasB. F., & MalladiR. K. (2020). Foreign direct investment and financial markets influences: Results from the United States. North American Journal of Economics and Finance, 53, 101182. https://doi.org/10.1016/j.najef.2020.101182
68.
ZakariA., & KhanI. (2022). Boosting economic growth through energy in Africa: The role of Chinese investment and institutional quality. Journal of Chinese Economic and Business Studies, 20(1), 1–21. https://doi.org/10.1080/14765284.2021.1968709
